Feb. 26 (Bloomberg) -- Singapore is the most likely hub for
trading natural gas and reducing the government interference
that keeps Asia’s prices higher than anywhere else in the world,
according to the International Energy Agency.

A new LNG terminal in Singapore, set to receive its initial
liquefied natural gas from Qatar in the first quarter, will serve
a wide array of tankers and boost import capacity “far beyond”
domestic needs, the IEA said today in a report. The city-state,
Asia’s oil-trading center, is also creating an example for Asia
by unbundling transmission from other gas and power
infrastructure and taking a “hands off” approach, according
the IEA, an energy adviser to 28 nations.

“Singapore is really quite under way to establish the
right infrastructure and the right market mechanisms, although
there is still some more to do,” Maria van der Hoeven, the
IEA’s executive director, said today in an interview with
Bloomberg Television.

Gas buyers in Asia now pay about five times as much as U.S.
consumers. They will be stuck with higher costs and insufficient
facilities for receiving, processing and transporting LNG as
long as governments promote state-owned companies and try to
restrict imports, the IEA said. Lower prices in the U.S. and
Europe reflect competitive and deregulated markets as much as
better access to low-cost supplies, the group said.

Linked to Oil

Asia is forecast to consume 790 billion cubic meters a year
of gas by 2015, making it the world’s second-biggest market,
according to IEA analysts led by Warner ten Kate. Imports are
dominated by long-term contracts linked to the price of oil
rather than spot cargoes reflecting the supply and demand for
LNG, gas that is chilled to liquid form for transport on
tankers.

About 88 percent of natural gas sold in Asia was tied to
oil rather than gas in 2010, a figure that has changed little
since 2005, the IEA said. Asian buyers began using oil indexing
for contracts because there was no existing LNG market in the
region, and gas was viewed as an alternative for crude in power
generation, according to the IEA.

Henry Hub

Sellers have come to rely on long-term, oil-linked
contracts to assure their returns on the investments needed to
develop gas fields and export infrastructure, while buyers use
oil markets to hedge LNG contracts, the IEA said.

Prices are lower in the U.S. because trades are linked to
the Henry Hub, a physical delivery point in Louisiana for New
York Mercantile Exchange contracts, the IEA said. A network of
North America pipelines and “the shale gas revolution,” keeps
costs down, the IEA said. The U.S. benchmark price for gas
settled yesterday at $3.414 per million British thermal units,
up 1.9 percent in 2013.

The U.K. is relying on a “virtual hub” known as the
National Balancing Point rather than a physical hub, the IEA
said. This benchmark, designed to reflect gas prices throughout
Britain without transportation costs, settled yesterday at the
equivalent of about $10.28 per million British thermal units.

An Asian hub would probably follow a Henry Hub-style
physical model, since it would primarily be used for trading
liquefied gas stored in tanks, as opposed to gas in its natural
state delivered via pipelines, Laszlo Varro, the head of the
IEA’s gas, coal and power markets division, said in an interview
today in Tokyo.

Japan’s Record High

Japan, the world’s biggest user of LNG, has been leading
the call to get away from long-term contracts, especially after
the nuclear disaster at Fukushima in March 2011 increased the
countries reliance on fossil fuels.

The Japan Crude Cocktail, a basket of prices for oil
imported into the country and used to calculate LNG prices, rose
to almost $127 a barrel in April, its highest level since
hitting a record of more than $135 in July 2008, according to
finance ministry data compiled by Bloomberg.

The average LNG price paid by Japanese buyers in July
reached the equivalent of $18.07 per million Btu, a record,
according to finance ministry data. Japan paid $15.79 in
December, according to the most recent data from the finance
ministry, down 5.2 percent from a year earlier.

Japan could have it’s gas bill cut by $10 billion a year if
its purchased were based on openly traded hub prices, Van der
Hoeven said. The country paid 6 trillion yen ($65.3 billion) for
LNG in 2012, according to finance ministry.

Singapore Advantage

“The most important thing is to see to it that prices can
be going down and that there is a better convergence between the
prices in the U.S., European and Asian markets,” she said.

Global spot prices for LNG will rise through 2015 and
begin to drop in 2016 and 2017 as new supply comes online,
according to a Feb. 19 report from a Goldman Sachs Group Inc.
Asian buyers, primarily China and India, will drive LNG prices
higher in a new bullish cycle starting in 2020, it said.

Asia will be saddled with the world’s highest prices until
it develops an LNG trading hub and transparent pricing,
according to the IEA.

Singapore is best-suited for regional gas trading because
government interference in markets is limited, allowing
fundamentals to set prices, the IEA said. The city-state is also
introducing wholesale pricing for natural gas.

Myriad energy trading companies are based in Singapore, the
IEA said. “Financial LNG swaps were introduced by banks in
Singapore in 2010,” the IEA said. “Financial parties serving
global commodity markets are already in place and well-positioned to serve emerging natural gas trade.”

Other Hubs

The master plan for Singapore’s LNG terminal calls for as
many as seven storage tanks and a peak capacity of 20 million
tons, Neil McGregor, chief executive officer for Singapore LNG
Corp., said in Feb. 20 interview. The company is currently
considering a fourth gas storage tank big enough to fit four
A380 jumbo jets to lower storage costs and hold cargoes from a
266,000 cubic-meter Q-Max LNG ship, he said.

Singapore’s main disadvantage is the relatively small size
of its domestic market, the IEA said. “This could limit the
number of players in the wholesale market, but a well-connected
hub could serve the region well beyond the city-state.”

Japan, South Korea and China are other potential LNG hubs,
the IEA said. They also lack features needed for a functioning
wholesale market, such as third-party access to terminal
capacity, the IEA said.

“Asia is large enough, both geographically and market-wise, to have more than one trading hub,” Varro said.